Many 401(k) plans permit participants to borrow money from their account. 401(k) loans can be popular with plan participants, but their complicated rules are often misunderstood. This is a problem because taxes or penalties can result when 401(k) participants violate these rules.
We get a lot of questions about 401(k) plan loans. Below is a FAQ with answers to the most common questions we receive. If you are a 401(k) participant, you can use our FAQ to understand when you can take a loan from your account and how to avoid taxes or penalties.
If your 401(k) plan allows loans, you can generally take a loan when the following conditions are met:
Most 401(k) plans require the full repayment of an outstanding loan balance upon termination of employment. If you fail to do so, your outstanding loan balance will be “offset” – basically, become a taxable distribution. Generally, loan offsets occur the earlier of:
You may be able to roll your loan to a new employer’s 401(k) plan to avoid an offset. Many 401(k) plans won’t accept a direct rollover of participant loans, but this option is a possibility.
For the most part, the offset of an outstanding loan balance is treated
The key difference? There is no 20% mandatory tax withholding unless the offset occurs simultaneously with a cash distribution.
Your 401(k) plan’s Summary Plan Description (SPD).